Tracker, Financial Services Regulation & Compliance - Banking

The Minister for Finance has passed the EU (Deposit Guarantee Schemes) Regulations 2015 (the Regulations) implementing the Deposit Guarantee Scheme Directive in Ireland. The Regulations appoint the Central Bank as the designated authority and provide for the establishment of a fund for the financing of a deposit guarantee scheme. The Central Bank is required to conduct stress tests, levy contributions to the fund from members of the deposit guarantee scheme, report to the EBA and assess the equivalence of 3rd country institutions' depositor protection. The Regulations set out rules in relation to the eligibility of deposits, cover levels (currently of up to €100K per eligible depositor), administration of the scheme and the provision of information to depositors.

Separately, the European Commission has published a legislative proposal which envisages the establishment of a European Deposit Insurance Scheme (EDIS) as the third pillar of the Banking Union. The proposal envisages three successive stages:

a reinsurance scheme for participating national DGSs in a first period of three years;

a co-insurance scheme for participating national DGSs in a second period of four years; and

full insurance for participating national DGSs in the steady state.

A national DGS would only benefit from EDIS if its funds are being built up in line with a precise funding path and it otherwise complies with essential requirements under Union law. The Single Resolution Board, which would be expanded to administer EDIS, would monitor national DGSs and release funds only where clearly defined conditions are met. The introduction of EDIS would be accompanied by ambitious measures in parallel to reduce risks in the banking sectors of Member States.

On 2 November 2015 the Central Bank published documentation on monetary policy instruments and procedures (MPIP). The Central Bank has implemented the ECB's General Documentation Guideline (which sets down rules for implementation of the Eurosystem monetary policy framework) through the MPIP and the collateral mobilisation agreements. The Bank’s counterparties are required to comply with the MPIP and any collateral mobilisation agreement to which they are party.

Central Bank publishes first Consumer Protection Bulletin on Current Accounts and Switching

The Central Bank publishes its first Consumer Protection Bulletin on current accounts. The Bulletin shows the following high level statistics:

Current account numbers are decreasing but account values have been increasing;

Switching levels remain low; and

Complaints regarding current accounts have increased and represent the largest number of banking complaints.

The European Banking Authority (EBA) is consulting on its draft guidelines on Deposit Guarantee Schemes (DGSs) stress tests. The proposed guidelines are intended to promote the quality and the consistency of these stress tests.

The guidelines will require DGSs across the EU to establish a programme of tests over a period of two to five years, covering specific scenarios and indicators. The guidelines identify key areas to be assessed, the types of intervention scenarios to be tested, and uses of funds provided for under the DGSD. The key areas to be tested range from data access to operational resources to communication and payments. DGSs will be required to run a number of priority tests and to report the results by 3 July 2019.

The European Banking Authority (EBA) has launched a consultation on its draft Implementing Technical Standards (ITS) on the procedures, forms and templates that competent authorities should use when consulting each other on qualifying holdings in credit institutions. The objective is to improve communication and streamline information exchanges. The consultation provides for a list of minimum information that should be requested and proposes more flexibility in respect of the information that an authority can require.

The consultation runs until 10 February 2016.

EBA publishes benchmarking report on the use of higher ratios for variable remuneration

The European Banking Authority (EBA) has published a report benchmarking credit institutions' remuneration practices concerning the use of the possibility to increase the maximum ratio between variable and fixed remuneration up to 200%. In the absence of shareholder approval, the Capital Requirements Directive (CRDIV) limits the ratio to 100%. The report shows that all but 6 Member States have allowed for the possibility to increase the ratio to 200% (with shareholder approval) but only institutions in 15 Member States have made use of this possibility. Institutions with approved higher ratios account for more than half of the market share of the banking system. Most of the identified staff that can receive a higher ratio work in investment banking.

The EBA and Competent Authorities will continue to monitor the development with regard to the approval of higher ratios and will take into account its findings in the review of the remuneration provisions mandated under Article 161 of the CRDIV.

The ITS replace the CEBS ‘Guidelines on the recognition of External Credit Assessment Institutions’. The ITS will also replace the existing mappings of External Credit Assessment Institutions' (ECAIs) credit assessments issued by the National Competent Authorities, as those mappings rely on those Guidelines.

The ‘mapping’ has to be provided for all ECAIs including any credit rating agency that is registered or certified in accordance with the CRA Regulation or a central bank issuing credit ratings that are exempt from the application of CRA Regulation. The objective is to open the market to undertakings other than the three main ones that already dominate the market.

The following aspects of these draft ITS represent a material contribution to the existing regulatory framework:

Specific requirements have been established for the calculation of the default rate. Special attention should be paid to the minimum size of the pool that qualifies for the calculation of the default rate and to the definition of the types of default events that should be considered by the ECAI;

Where insufficiently numerous internal default data are available, an estimate of the quantitative factor is required based on the own belief of the ECAI and taking into account the prudential purpose of the CRR;

Special effort has been devoted to the implementation of the qualitative factors. A full characterisation of the use of such factors is not possible given the relevance of expert judgement in the mapping process.

In cases where there is limited quantitative information the ITS propose that two mappings should apply: a first mapping should apply for a limited period of 3 years; thereafter another mapping should become applicable. The quantitative factors for deriving the first mapping applicable until 31 December 2018 should be relaxed. This would allow ECAIs which present limited quantitative information to enter the market and would incentivise them to collect a sufficient number of data.

EBA publishes follow up report on the use of allowances in remuneration policies

In October 2014 Competent Authorities were asked to use supervisory measures to ensure that, by 31 December 2014, institutions using "role-based allowances" adjust their remuneration policies in line with the criteria set out in the EBA Opinion.

The follow-up report concluded that Competent Authorities have taken measures in this respect and, where necessary, asked institutions to implement the necessary changes. On account of the fact that the EBA's Opinion was published in October 2014, it was not always possible for institutions to retroactively change their practices for the performance year 2014. Most affected Competent Authorities took measures that will only affect the remuneration awarded for the performance year 2015. The follow-up report highlighted that Competent Authorities are awaiting the publication of the final EBA Guidelines on sound remuneration policies before adopting specific legal or regulatory instruments following the publication of the EBA's Opinion. The guidelines are expected to be finalised by the end of 2015.

EBA consults on the treatment of credit value adjustment (CVA) risk under the supervisory review and evaluation process (SREP)

The European Banking Authority is consulting on guidelines on the treatment of CVA risk under the supervisory review and evaluation process (SREP), as well as a data collection exercise for the Quantitative Impact Study (QIS) to calibrate the threshold values. The guidelines aim to provide a common European approach to the assessment of CVA risk under SREP, including adequacy of capital to cover for this risk, and the determination of any potential additional own funds requirements.

The Capital Requirements Regulation (CRR) acknowledges the potential for intra-group financial support under stress conditions when some of the institutions belonging to the same group experience liquidity difficulties. Preferential treatment in the calculation of the liquidity coverage requirement for intra-group liquidity flows may be applicable. The LCR Delegated Act specifies additional objective criteria for this preferential treatment. The CRR mandates the EBA to develop draft regulatory technical standards (RTS) to further specify such additional objective criteria. The EBA is seeking views on the proposed RTS.

ISDA, SIFMA, ICMA and ISLA announced the execution by 21 global systemically important banks (G-SIBs) of a revised ISDA Resolution Stay Protocol. The protocol coverage has been extended beyond OTC bilateral derivatives contracts to securities finance transaction (SFT) master agreements. In order to facilitate an orderly resolution of a G-SIB, the protocol provides that counterparties agree to the cross-border enforceability of existing statutory stays on resolution-related early termination in OTC bilateral derivatives contracts and securities financing agreements.

Financial Stability Board publishes the 2015 update of the Globally Systemically Important Banks and Insurers lists

On 3 November 2015 the Financial Stability Board (FSB) published updated lists of global systemically important banks (G-SIBs) and Insurers (G-SIIs). The updated bank list comprises a total of 30 banks with one new bank, China Construction Bank, being added and one bank, BBVA, being removed from the list. Royal Bank of Scotland was also moved down into the 1% bucket for required higher loss absorbency. The updated G-SIIs list comprises a total of nine insurers with one new insurer, Aegon, being added and with Generali being removed.

The Financial Stability Board (FSB) published the fourth annual progress report on Implementing the FSB Principles for Sound Compensation Practices and their Implementation Standards which aim to reduce incentives for excessive risk-taking arising from the structure of compensation schemes in significant financial institutions.

Almost all FSB jurisdictions have now fully implemented the Principles & Standards for banks. Most jurisdictions have embedded oversight of compensation practices in bank supervisory frameworks. The report finds important differences between jurisdictions in the implementation of the Principles and Standards in the insurance sector.

The FSB’s Compensation Monitoring Contact Group will undertake further work in five areas:

CMCG will follow up on these certain recommendations for action by national authorities from the 3rd progress report;

Supervisory authorities will coordinate via CMCG to explore the use of indicators to monitor the effective risk alignment of compensation structures;

The FSB will continue to monitor compensation practices in other financial sectors;

CMCG will continue to collect information and assess the need for strengthening disincentives to misconduct through compensation-related tools; and

The Financial Stability Board (FSB) has published its Principles on the Loss Absorbing and Recapitalisation Capacity of globally systemically important banks (G-SIBs) in Resolution and Total Loss Absorbing Capacity (TLAC) term sheet. The Basel Committee welcomes comments on the TLAC holdings consultative document until Friday 12 February 2016.

The FSB has also issued the final TLAC standard for G-SIBs. The TLAC standard defines a minimum requirement for the instruments and liabilities that should be readily available for bail-in in the context of resolution of G-SIBs. Authorities’ may under the applicable resolution law also expose other liabilities to loss through bail-in or the application of other resolution tools.

The Financial Stability Board (FSB) has published its report Standards and Processes for Global Securities Financing Data Collection and Aggregation. The finalised standards and processes define the data elements for repos, securities lending and margin lending that national/regional authorities will be asked to report as aggregates to the FSB. The report contains 6 recommendations to national/regional authorities in order to ensure consistency.

As part of the Financial Stability Board's (FSB) framework for haircut floors for non-centrally cleared securities financing transactions (SFTs), the FSB recommended that the Basel Committee on Banking Supervision incorporate the haircut floors into the capital requirements for non-centrally cleared SFTs by setting higher capital requirements for transactions with haircuts traded below the haircut floors. The objective of the proposal is to incentivise banks to set their collateral haircuts above the floors rather than hold more capital.

The consultation is open until Tuesday, 5 January 2016.

EBA publishes 2016 EU-wide stress test draft methodology

The European Banking Authority (EBA) has published its 2016 EU-wide stress test draft methodology for discussion. The stress test will be carried out at the highest level of consolidation on a sample of banks covering approximately 70% of the EU banking sector. 53 EU banks will participate, 39 of which fall under the Single Supervisory Mechanism (SSM).

No single capital threshold is defined for this exercise rather banks will be assessed against relevant supervisory capital ratios under a static balance sheet. EU banks' resilience will be assessed against a common macroeconomic baseline and adverse scenario based on 2015 year-end figures, and applied over a period of three years to end-2018. The final methodology will be published at the launch of the stress tests in February 2016. The outcomes of the stress test are expected to be published at the beginning of Q3 2016.

In response to a Financial Stability Board (FSB) sponsored survey of jurisdictions and banks confirming that approximately half of emerging market and developing economy jurisdictions have experienced a decline in correspondent banking services, the FSB has published a report to the G20 on actions taken to assess and address the decline in correspondent banking.

The FSB will continue to work to address these issues through a 4-point action plan:

further examine the dimensions and implications of the issue;

clarify regulatory expectations;

build domestic capacity in jurisdictions that are home to affected respondent banks; and

The Financial Stability Board (FSB) has published a progress report for the G20 on reducing misconduct risk in the financial sector. The report sets out details about the FSB-coordinated work to address misconduct in the financial sector and the timeline for the actions. The report focuses particularly on

The role of incentives in reducing misconduct in markets and institutions; and

International coordination on conduct in Fixed Income, Currencies and Commodities (FICC) markets.